Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

Chancery Court Denies “Litigation Financier” Attorneys’ Fees

In Judy v. Preferred Communication Systems, Inc., (opinion available here), decided September 20, the Court rejected a motion by intervenor Preferred Spectrum Investments, LLC (“PSI”) for attorneys’ fees.  Judy rules that litigation financiers do not have standing to seek attorneys’ fees for corporate benefits created by the funded lawsuit.  It is also a useful review of many of the reasons a fee petition might be rejected.

Preferred Communication Systems, Inc. (“PCSI”) was formed by individuals with criminal records, including Pendleton Waugh, to buy licenses issued by the Federal Communications Commission (the “FCC”) and solicit money from investors.  Later Waugh was ousted from control of PCS; then he along with new ally Carole Downs formed PSI as a vehicle to regain control of PCSI and to solicit additional investor funds.  They told investors they would use those funds to loan money to PCSI in return for equity.  When PCSI refused to agree to this, Downs and Waugh instead used PSI money to fund another associate, Michael Judy, to litigate a series of lawsuits in the Delaware Court of Chancery (as consolidated, the “Judy Action”).  Ultimately the Court in the Judy Action temporarily appointed a court receiver, made changes to PCSI’s capitalization, and ordered an annual meeting.

At a January 2013 annual meeting, a PSI-backed slate of directors including Downs and Judy (Waugh having passed away) was elected.  In June 2014, a transaction closed in which (in essence) PCSI sold many of its licenses to Sprint for $60M.  Later Judy and Downs had a falling out and persons closely associated with PSI including Downs were removed as PCSI directors.

PSI then intervened in the Judy Action to seek attorneys’ fees, albeit without the cooperation of plaintiff and former ally Judy.  PSI claimed that the Judy Action had saved PCSI and its licenses, sold and unsold.  It claimed tens of millions of dollars as its appropriate share of the value of those licenses under a corporate or common benefit theory.  Alternatively, PSI sought recovery of over $8M in alleged charges associated with the Judy Action under a quantum meruit theory.

The Preferred Investors Association (the “PIA”), an association of PCSI stockholders, took the lead in opposing the petition.  The Court wholly rejected the petition.

PSI lacked standing because it was not plaintiff, only “a source of financing”.  The Court followed past precedent which has refused to broaden the common benefit doctrine into a “generalized mechanism for achieving redistributive justice.”  The Court noted that PSI could have formed a contract with Judy to be repaid by a court-ordered fee award but chose not to.  Therefore, the Court rejected PSI’s argument: “Litigation financiers do not need the common benefit doctrine to give them an incentive to finance litigation.”

The Court also rejected the petition on the basis of precedent that the Court will not award fees if the litigation was filed in support of a takeover effort.

The Court also rejected PSI’s request for a percentage award upon concluding that PSI did not cause the benefit.  Even under PSI’s version of events, the Judy Action was only one of many reasons the licenses were monetized.  This led the Court to liken PSI’s argument to the story about the “horseshoe nail that lost the kingdom”.  In fact, the Court found, PSI had affirmatively jeopardized the licenses.

Finally, the Court separately rejected PSI’s quantum meruit theory for a number of reasons.  PSI had made previous representations to PCSI stockholders that they would not bear expenses associated with the Judy Action.  The Court also found a host of factual issues with the various claimed costs (for example, some were not associated with the litigation, while others paid for arguments not in PCSI’s interests).

The Williford Firm LLC served as counsel for the PIA in this action.

Filed under: Attorneys' Fees, Court of Chancery

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Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.